SAFE Enough

This is the first article in a series that will be published over the next two weeks that covers the SAFE Banking Act of 2020 (Secure and Fair Enforcement of Banking Act, H.R. 1996). A brief note to anyone who has come here accidentally seeking information about the SAFE Banking Act of 2008 (Secure and Fair Enforcement for Mortgage Lending Act). You can nope out right now as the rest of this post will cover the intricacies of cannabis banking which may be of interest in its own right, but has little to do with mortgages.

Cannabis Banking, like the breathless reporting on cannabis legalization, always seems to be on the verge of happening. The House passed the SAFE Banking Act, and again, the news media has churned out article after article saying this shows progress being made. Sen. Jeff Merkley then sponsored the Senate version of the SAFE, increasing the smoke but not necessarily the fire. So why do we see the SAFE Banking act perennially getting introduced to effectively go nowhere? More importantly, if it does get passed, will it actually do what supporters say it will do? Below, I’m going to address what the SAFE Banking Act is, what it actually addresses, and what it will really take to change cannabis banking. Hopefully you can get some clarity on why cannabis banking is harder than the reporting indicates.

What is SAFE?

SAFE is a law that is designed specifically to, “create protections for financial institutions that provide financial services to cannabis-related, legitimate businesses and service providers for such businesses, and for other purposes.” How does the SAFE act look to do this:

1. Create a safe harbor for banks and credit unions that offer services to legitimate cannabis related businesses or service providers.
2. Specify that monies derived from legitimate cannabis related businesses or service providers are not funds derived from illegal activity.
3. Extend protections from federal agencies for financial institutions, insurance companies, and lenders that provide services to legitimate cannabis related businesses or service providers. This includes things like asset forfeiture, criminal liability, civil liability, etc.
4. Ensure that hemp related companies and service providers have the same protections and coverage as cannabis.
5. Specify rules by which Banking and Credit Union regulators can dictate the termination of cannabis related accounts.
6. Reduce discretionary surplus funds for Federal Reserve System Members.

Based on the SAFE’s language and design, it embraces some underlying assumptions as to the root cause of the failure of the market to provide banking services. These assumptions are embedded throughout the bill itself. Let’s see if we can identify those assumptions.

Federal Banking and Credit Union regulators are keeping banks and credit unions from providing services to the industry.

The Act spends most of its language exempting financial institutions serving “cannabis related legitimate business” from federal laws or limits the ability of federal regulators to take certain actions against the financial institutions. For example, the first section limits federal banking regulators from revoking deposit insurance from depository institutions solely on the basis of the institution banking cannabis businesses.

Losing deposit insurance for a depository institution would be equivalent to a death sentence for the institution. It would send a signal to all its customers that their money is at risk and would trigger a run on the bank or credit union as people withdrew and removed their funds. Since regulators are really insurers, triggering a run on a bank is the most likely way to also trigger a deposit insurance payout.

It quickly becomes apparent that Congress has a constrained ability to dictate to banks or credit unions that they must take cannabis accounts as part of their business. Most of what it can do is incentivize financial institutions to work with the industry. What this means in practice is that the SAFE Banking Act is limiting or dictating to federal banking and credit union regulators what they are allowed to do when financial institutions open accounts for the cannabis industry.

Federal law and the Department of Justice’s (DOJ) ability to prosecute banks and credit unions for money laundering violations prevents financial institutions from providing services to the industry.

No banker or financial institution executive wants to be on the business end of the justice department or US Treasury charges for money laundering. The DOJ and the Treasury have brought successful cases in the past against both bankers and other financial institution executives. The examples of Moneygram and US Bank are particularly instructive. Both US Departments are very aggressive in going after individuals at institutions that have shown a willful disregard for Bank Secrecy Act (BSA) and anti-money laundering rules and regulations. As such, compliance officers tend to take a very thoughtful approach to business and industries classified as high risk. Every financial institution is required to designate a Bank Secrecy Act officer, an executive of the company who the federal government will hold accountable for actual implementation of the rules and regulations articulated by the Bank Secrecy Act.

The text of the SAFE Banking Act is written to ensure that the federal prosecutors, as well as other federal agencies, do not apply the current set of drug and anti-money laundering laws against financial institutions or compliance officers just for servicing cannabis businesses. There are many federal laws and regulations that target drug proceeds and money laundering and therefore a lot of tools that federal prosecutors have at their disposal which SAFE will limit.

Monies derived from cannabis activity are illegal funds and therefore financial institutions can’t take that money.

One of the eye opening moments for us when we began working on addressing the cannabis banking issue was learning that a financial institution depositing cannabis money is not in itself illegal. The illegality for financial institutions comes from the act of transacting with the funds after deposit. There are two sections of the Money Laundering Control Act (MLCA) that apply here. Section 1956 requires knowledge that the funds were illegally derived and the intent to further criminal acts and section 1957 simply requires that the transaction of illegal proceeds exceeds $10,000 with corresponding knowledge of the source of the proceeds.

Section 1957 of the MLCA is the challenge for financial institutions with regards to cannabis. The SAFE Banking Act looks to address that directly by making any monies derived from “legitimate cannabis businesses” exempt from both of these sections. It should be noted that SAFE would also provide cover for section 1956 as well even though financial institutions can demonstrate on their own that there was no intent to further criminal acts.

Next time: we’re going to look at how there’s currently a disconnect over what’s reported that SAFE will accomplish and what SAFE will actually accomplish. You’ll need to briefly remember these assumptions because ultimately they foreshadow what SAFE can actually ac

If you have any questions about this post, or more generally on cannabis banking, feel free to email us at info@leftcoastfs.com.

Left Coast Financial Solutions Inc. is a neobank based in Portland, Oregon. They are the only neobank that is opening cannabis accounts in the state of Oregon. Together with Integritas3, Green Light Law Group, and M2I, Left Coast has implemented a compliance program that adheres to all regulatory guidance and has enabled it to reach operations with over two dozen customers. In the course of addressing the cannabis banking problem, Left Coast has become experts in the intricacies of issues at hand. If you have questions about neobanks and banking, cannabis banking, or seeking help getting a bank account feel free to reach out to info@leftcoastfs.com.